Oil price storm sweeps through the aviation industry! Ryanair, Europe's largest low-cost carrier, warns: jet fuel prices could reach $140 this winter, prompting capacity cuts to protect profits.

The energy shock is rapidly spreading from the commodity market to the real economy, with the aviation industry being the first to feel the pressure.

On Wednesday, it was reported that Ryanair, Europe's largest low-cost carrier, announced cuts to winter capacity and warned that if fuel prices remain high, the European aviation industry will face greater cost pressures, and short-haul airfares in Europe could see a "substantial increase" next year.

Ryanair stated that it has hedged approximately 80% of its jet fuel demand, making it one of the airlines with the highest hedging ratio in the industry. However, it still faces unhedged exposure equivalent to a jet fuel price of $140 per barrel. In the context of high oil prices, the company has proactively reduced winter flights to lower fuel costs, which is expected to save between €70 million and €100 million (approximately $81 million to $116 million).

This decision sends a more noteworthy signal: when airlines have already locked in most of their fuel costs but still need to reduce capacity to protect profits, energy price shocks are no longer just a trading theme in the commodity market, but are beginning to substantially affect corporate business decisions.

Moreover, the pressure on the aviation industry is not solely due to rising crude oil prices. The volatile situation in the Strait of Hormuz is simultaneously pushing up prices for refined energy products such as gasoline, diesel, jet fuel, and European natural gas, making it difficult for companies to alleviate cost pressures simply through a decline in crude oil prices. Brent crude oil is currently still around $95 per barrel, with a cumulative increase of over 55% this year.

Soaring fuel costs are affecting even high-ratio hedging.

Ryanair's capacity cuts directly illustrate how energy prices are being passed on to airline profits.

The company has hedged approximately 80% of its jet fuel demand, but the remainder remains exposed to high fuel prices. Rather than maintaining all flights while fuel costs are high, Ryanair has chosen to proactively reduce capacity in exchange for cost savings and profit margins.

Jeff Currie, a senior advisor at the Carlyle Group and a well-known commodities analyst, had previously warned that the market may be underestimating the pressures facing the refined petroleum products market. In an interview on August 18, he stated that the market's focus should not be solely on crude oil prices, as consumers are actually using gasoline, diesel, and jet fuel, and the supply and demand situation in these refined petroleum products markets is "far worse."

This means that even if crude oil prices subsequently fall, the cost pressures faced by the aviation industry may not necessarily ease in the same way.

The fluctuating situation in the Hormuz has led to an energy shock that has spread from crude oil to refined oil products.

The situation in the Strait of Hormuz remains the core variable in this round of energy price increases. Repeated breakdowns in negotiations regarding passage through the strait have continued to dampen market expectations for a rapid de-escalation of the situation.

Rich Privorotsky, head of trading at Goldman Sachs' One Delta division, noted in his daily briefing to clients on Tuesday that previous oil price spikes were often followed by intervention, diplomatic maneuvering, or other forms of de-escalation efforts. However, recent developments, particularly the US strikes on Iranian targets while oil prices were already rising and trading was in progress, have further exacerbated market concerns.

More notably, the impact is no longer limited to crude oil. Privorotsky stated that even if the US subsequently takes measures to de-escalate the situation, crude oil will only be part of the problem, as distillate fuels, gas oil, diesel, and European natural gas prices have all broken through key levels.

For airlines, this means that what they really need to be wary of is not just Brent crude oil, but the further push up jet fuel prices after the refining and refined oil markets have been under continued pressure.

The United States has low strategic petroleum reserves, limiting its policy buffer.

The continued rise in oil prices is also putting increasing pressure on the US government.

U.S. Energy Secretary Chris Wright said on Tuesday that about 17 million barrels of crude oil were still being transported through the Strait of Hormuz on Monday, not significantly lower than the pre-crisis average of about 20 million barrels per day. However, Privorotsky believes this figure remains highly controversial.

Finance Minister Bessant stated that the Strait of Hormuz could become "worthless" within two years as overland pipeline routes gradually bypass it.

However, in the short term, the United States does not have sufficient policy buffer space. The U.S. Strategic Petroleum Reserve has now fallen to about 286 million barrels, far below its maximum capacity of about 730 million barrels, and is approaching the market's estimated safe operating range of 250 million to 300 million barrels.

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